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Expat Taxes

Why You Should Use an Expats' Tax Professional

by
Bret Willoughby
on
8/31/2016
Why You Should Use an Expats' Tax Professional

If you are an American citizen who’s living abroad, you may feel that you can handle filing your expatriate tax return on your own. Experts say that even if you found the task of completing tax returns simple when you were living in the United States, you are likely to find the expatriate tax return forms particularly challenging, so it is probably a wise idea to hire a professional.

Here are just a few good reasons why:

  1. Expatriates are required to fill out multiple tax forms. Not only do they have the same filing requirements that are part and parcel of filing when in the U.S., submitting the 1040 and all other applicable forms, but they also generally need to complete a number of additional forms. Expatriates who are working abroad need to determine whether or not they qualify for the Foreign Earned Income Exclusion and the Foreign Housing Exclusion or Deduction, and if they do qualify, then they need to submit a multi-page Form 2555 along with their other U.S. tax forms. A U.S. citizen or resident who has moved abroad to work must meet either the physical presence or bona fide residence test to claim these exclusions or deductions. Failure to prepare and submit the required form would cheat you out of substantial tax benefits, but preparing it incorrectly is all too easy and extremely common. In fact, a recent study conducted by the U.S. Treasury indicated that roughly one in ten tax returns filed by expatriates was wrong as a result of filling out Form 2555 incorrectly or taking exclusions that did not apply.
  2. If you paid foreign taxes, you may also qualify for a foreign tax credit. However, you cannot claim both the foreign income exclusion (previously discussed) and a foreign tax credit based on the same income. Thus you may have to determine which tax benefit provides the best result. In addition, where your foreign income exceeds the excluded amount, there is an opportunity to claim a foreign tax credit on the difference.
  3. Even if you’re a pro at preparing your U.S. tax returns, you may also be responsible for filing and paying taxes in the country where you’re residing – and you’ll have to sync up the two tax obligations to each other. Unfortunately, though the rest of the world follows the United States in a lot of areas, the tax year is not one of them. If you live in a country that is on a different tax calendar, you face the added complication that comes with having to file your U.S. taxes based on U.S. law, which requires that you include information from your host country’s tax statements for the previous two years.
  4. You may be far away, but the IRS and Treasury have their eyes on you. Reviewing expatriate tax returns has become a top priority of these agencies in the last few years, as more and more Americans have been using offshore bank accounts to avoid U.S. taxes. To ferret out those using foreign accounts to avoid taxation, the Treasury Department has been pressuring foreign banking institutions to divulge the names of U.S. citizens with accounts in their institutions. The Treasury Department also has a Foreign Bank Account Reporting requirement for those individuals with signature authority or ownership of foreign financial accounts, which is a separate filing from the individual 1040 and has draconian penalties for failure to file. A statement of foreign financial assets must also be included with the 1040. In addition there are reporting requirements for ownership of or transaction with foreign trusts, ownership or voting power in foreign corporations, and reporting of gifts or bequests from foreign sources. A simple oversight of foreign reporting obligations can lead to substantial penalties.
  5. In addition to having to familiarize yourself with all of the specific rules that apply to expatriates, simply keeping up-to-date on changes to the U.S. tax laws that apply to you can be a challenge. Looking at the last few years alone, there have been multiple changes to the tax code that impact expatriates. These include changes to the earned income credit, child tax credit, itemized deductions, personal exemptions, alternative minimum tax, and child-related tax issues, as well as increased penalties for failure to file and more. Each new political season and tax year brings more adjustments, and keeping up with them can be a full-time job in and of itself. In fact, it is. That’s what tax professionals do.
  6. Even if you have lived abroad for a few years, you may be obligated to file a tax return with the state where you previously lived and had a tax domicile. There are a number of states that may consider you to still be a resident of that state for tax purposes even though you are residing in a foreign country. Each of them considers a number of criteria to determine whether you are a resident of that state, including your voter registration, driver’s license, bank account, property ownership, whether you departed the U.S. from that state, where your family resides and more, and it is important that you work with a professional who can provide you with advice about your specific requirements in order to ensure that you don’t end up owing back taxes and penalties to a state.
  7. Though you may feel that you’ve covered your bases by purchasing tax software, those programs rarely address the needs of expatriates. Not only are you likely to end up missing out on deductions or exclusions available specifically for those living and working abroad that would save you money, but you also risk incorrect calculations and underpayments for which you could end up owing penalties.

There are many advantages to living abroad, but it can bring some paperwork and bureaucratic nightmares along the way. To ensure that your expatriate tax filing is completed in a way that provides you with the most benefit and least risk, contact our office today at (913) 712-8539 or through our website, www.tax911.com.

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Bret Willoughby

Bret Willoughby

Bret Willoughby is a practicing tax preparer for expats throughout the world. He created Providence Payroll to meet the needs of Churches, not-for-profit organizations and businesses with remote workers. His web-based payroll processing service benefits both employers and remote workers with an easy way to access payroll information. Clergy have unique payroll and tax-related issues, one that Providence Payroll is qualified to manage.

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